William E. Dodd, US Ambassador, Address to the American Chamber of Commerce in Berlin, 1933:

"One may safely say that it would be no sin if statesmen learned enough of history to realise that no system, which implies control of society by privilege seekers, has ever ended in any other way than collapse."

John Maynard Keynes introduction to his General Theory (1936), German edition:

“The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire…. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced.” [My underlining – FJS]

In the estimation of Seth Klarman (Baupost Partners): “We all owe a great debt to Fred Sheehan. Fred demolishes the myth of Alan Greenspan’s omniscience, while revealing the dangerous credulity of those who set him on a pedestal above the rest of us. Panderer to Power will be invaluable in making the case for how we might preserve our solvency and our system.”

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"The Coming Collapse of the Municipal Bond Market"

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"Chairman Greenspan: A Fiat Mind for a Fiat Age"

For speaking, interview, writing, and research requests,
please contact Frederick Sheehan at info@aucontrarian.com

Insights and Analysis

Friday, September 19, 2014Anything Goes - Again

Lee Thomas Smith, National Association of Building Owners and Contractors annual convention, 1926

So intense was real estate speculation in 1925, one-eighth of the national economy was devoted to building in 1925. [This was also true of the property mania in 1890. - FJS] "Buildings were being put up through the endeavors of bond houses to sell bonds, whether the buildings were needed or not. During 1925, $675,000,000 of real estate bonds were sold in this country... an increase of more than 1,000 per cent in the last five years." - Read more

Friday, September 12, 2014Tail Risk

In a recent memo to Oaktree Capital clients, Chairman Howard Marks writes about "the time I spent advising a sovereign wealth fund about how to organize for the next thirty years. My presentation was built significantly around my conviction that risk can't be quantified a priori. Another of their advisors, a professor from a business school north of New York, insisted it can. This is something I prefer not to debate, especially with people who're sure they have the answer but haven't bet much money on it."

This is an excellent illustration of the investment mind today. It treasures mathematical models that produce certainty. The finance professor is talking through his hat, but he need not fear an academic challenge. This is what the tenured teach and, alas, what students take to their jobs.- Read more

Saturday, September 6, 2014What Does the Media Do?

What do reporters do all day? In "Exclusive!" "Shocking!" "Extra, Read All About It!" breaking news, AuContrarian.com published the damning testimony of (in 2008 - in all cases) Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben S. Bernanke, and New York Federal Reserve President Timothy Geithner in "Sell Financial Stocks - and Bonds" (September 5, 2014). Quoting from their own words, from the "The Plaintiff's Corrected Proposed Finding of Fact," in Starr International Co. v. United States,the trio broke the law when they nationalized AIG, and, showed they had no idea what they were doing. - Read more

Some Things Never ChangeOld Insights Now Relevant

The blowup ahead is baked in the cake, just as it was in 2007. “When and where will it start?” is often asked. The proverbial snowflake that launches the avalanche fell some time ago. It is more difficult to interpret the when and where of collapses than in olden days with so much interference in markets. The avalanche rumbling in the distance is probably credit rather than the stock market. Stocks get much more attention, so the blame will most likely fall on Facebook or Yelp! or Twitter or Tweeter or Cynk or Right, On! or Drop Dead!

In the June 2007 and July 2007 issues of Marc Faber’s Gloom, Boom, and Doom Report, I described the collapse we were then entering. I discussed similarities to the 1960s and 1980s credit busts. (Credit is usually the reason. In 1929, margin loans, foreign loans, and the Florida Land Bubble pushed the stock market to the point of no return. The dot.com crash in 2000 was made much worse from telecom borrowing.)

This is an introduction to a condensed version of what appeared in the Gloom, Boom, and Doom Report under the title of “Tin Men with Tin Ears.” It was abbreviated for the November 2007 issue of Charles Allmon’s Growth Stock Outlook.

This is also an introduction to the new-and- improved AuContrarian website.“Some Things Never Change” will be a regular feature. Here is a link to the Growth Stock Outlook version of “Tin Men with Tin Ears.”

This précis was entirely wrong in one regard. The comparison to the earlier periods went beyond financial similarities to the public outcry that accompanied the destruction. In the 1960s and 1980s, public opinion, the media, Congress, and the courts did justice to the perpetrators. After 2008, the worst offenders, sometimes having committed multiple felonies, were not touched. Not one of them, in the United States, at least, even had to appear in a courtroom. They have gotten richer and richer, with the means to isolate themselves even further from the body politic.

June 21, 2004:“[Americans] are caught in the pitiable condition of not being able to live on 1% interest; the disincentive to save has been energetically promoted with a short-term yield of microscopic content…. The flows have not been channeled towards productive enterprise but towards speculation.”

July 1, 2007: “The CDO and CLO markets have acted as both lubricant for structuring credit with no thought to tomorrow and as glue by which all asset classes have risen the past couple of years."

December 2012: “It is important to note, for all the talk of deleveraging, there has not been a single quarter when non-financial debt decreased. The government took over when consumer debt and investment bank leverage collapsed between 2007 and 2009…. [C]orporations increased borrowing by 6.2% in the third quarter…. [N]et capital investment by corporations during the quarter was negative. This is the death knell for companies and economies alike. …. Sufficient investment leads to profits. Profits generate more capital to invest. This cycle was propounded by J. Maynard Keynes: ‘It is investment, i.e., the increased production of material wealth in the shape of capital goods, which alone creates national wealth.’”

About Frederick Sheehan

Frederick J. Sheehan Jr. is a consultant to institutional investors. He advises on asset allocation, portfolio risk management, and asset strategies to meet long-term liability commitments. He has a depth of experience advising corporate, municipal, and union defined-benefit pension plans. He integrates top-down asset allocation with bottom-up, fundamental, value assessment. He is a Chartered Financial Analyst.